In this Friday, April 22, 2016 a marijuana bud is seen at a medical marijuana facility in Unity, Maine. Canopy Growth Corp. reported a $1.3-million loss in its latest quarter despite doubling its revenue compared with a year ago, sending its shares lower in early morning trading. THE CANADIAN PRESS/AP-Robert F. Bukaty

Pot companies gear up at home, cast global net in strong quarter: analysts

TORONTO — Canadian marijuana companies were riding high in the latest quarter as they ramped up production capacity ahead of the deadline for the legalization of recreational cannabis next summer while also extending their reach outside the country’s borders, analysts say.

Canopy Growth Corp. (TSX:WEED), Canada’s largest licensed marijuana producer, was the latest to report its second-quarter earnings, posting a $1.3-million loss attributable to shareholders, despite doubling its revenue compared with a year ago.

Still, its chief executive Bruce Linton told analysts Tuesday the company is “driving ahead” and taking actions now needed to position the company for the future, such as strategic partnerships in Denmark and Jamaica.

“The international opportunities are now increasingly happening,” Linton said on Tuesday’s conference call.

It was a strong quarter for Canadian cannabis companies, said Russell Stanley, an analyst with Echelon Wealth Partners, with many indicating they are on track and on budget with expansion plans ahead of the federal government’s July 2018 deadline for the legalization of recreational marijuana.

Still, as marijuana companies gear up for the domestic recreational market amid concerns of a supply shortage, many have also been laying the groundwork to benefit from future growth markets such as Germany and Brazil, he said.

“Specifically on the medical front, the potential for exporting to other markets or establishing a partnership on a local basis and produce domestically, in country, is there and very real and in markets that are substantially larger than ours,” Stanley said.

For example, MedReleaf (TSX:LEAF) in August completed its first international export of medical cannabis oil to Brazil, Canopy Growth in September signed a supply license agreement to Spain and a strategic partnership in the Danish market, while Aurora Cannabis shipped its first 50 kilograms of dried cannabis flower to Germany through its subsidiary in September.

Shares of Aurora (TSX:ACB) shot up more than 28 per cent Monday on the back of its earnings last week that showed a 169 per cent jump in revenues in the quarter ended Sept. 30, and $1.2 million in sales of dried cannabis in Germany, said Chris Damas, the author of the BCMI report.

There has been much talk about the potential for international sales from Canadian licensed marijuana producers, but Aurora’s disclosure was the first to quantify them, he said.

“These companies are really attacking the export markets… That is really where the growth is going to be. I think most companies and analysts too have come down in their expectations for domestic sales,” Damas said.

He noted that the distribution plan for recreational cannabis in Ontario, the largest market, with 40 stores initially is unlikely to support the kind of growth these companies seek.

However, the ripple effect of marijuana exports on the domestic supply of the drug is unclear.

MedReleaf chief executive Neil Closner told analysts on its second-quarter earnings call that it is there is likely to be more demand than supply when recreational pot is legal.

“We may have to make difficult decisions on which markets we initially support and where we allocate our products,” he said on Monday.

Stanley says the ongoing medical cannabis shortage is likely to persist in the near term. But with Health Canada ramping up approvals of new licensed producers, to 73 currently, up from 38 at the end of January, the gap is likely to close in the medium and long term, he said.

“Whatever supply shortage that we see in the near term, the market’s going to iron them out, ” Stanley said. “Because the single biggest barrier to ironing them out is really no longer much of a barrier.”

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